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16 July 2021

EU Sustainable Finance Strategy – new developments and implications for the real estate sector

Agathe Kuhn – July 2021

 

The European Commission recently made a series of key announcements related to the EU sustainable finance strategy (first published in 2018). These were sequenced into two main moments: the publication of the Sustainable Finance Package in April 2021 and of the publication of the renewed Sustainable Finance Strategy in July 2021.

The measures introduced aim to reinforce the EU’s efforts to channel money towards sustainable economic activities. They also seek to clarify the role of financial markets in transitioning to a more resilient economy, while enabling a green recovery from the covid-19 economic crisis.

This article focuses on the elements that will have significant implications for real estate companies and financial market participants – this includes:

  1. The renewed sustainable finance strategy
  2. The proposal for EU Green Bond Standard (EUGBS)
  3. The EU Taxonomy Delegated Acts
  4. The Corporate Sustainability Reporting Directive (CSRD) proposal

1. Updated sustainable finance strategy

The EU Commission published its renewed sustainable finance strategy on 6 July 2021 – entitled a ‘Strategy for financing the transition to a sustainable economy’. Its main objective is to generate private finance for the investments that will be needed to reach the EU’s climate targets (-55% GHG emissions by 2030) – which are currently estimated at €460 billion per year. The strategy focuses on four key elements:

  • financing the transition to sustainability;
  • providing access to sustainable finance to all individuals and SMEs;
  • Ensuring a higher contribution of the financial sector to meeting Green Deal targets, and make it more resilient to sustainability risks;
  • promoting an international consensus around the sustainable finance agenda.

 

2. European Green Bond Standard

As part of its renewed sustainable finance strategy, the European Commission also published a proposal for a standard for European green bonds (EUGBS). The introduction of such a standard was a one of the actions listed in the EU sustainable finance strategy in 2018 and the EU’s reiterated its commitment to it in the EU Green Deal. Once adopted, the voluntary standard will set a benchmark for how companies and public institutions can use green bonds to raise funds for large-scale investments in green projects. Key requirements proposed include:

  • Alignment with EU Taxonomy criteria;
  • Transparency on how the bonds are allocated (ensured through reporting requirements);
  • External review of all European green bonds to ensure compliance with EU regulations.

The EUGBS will be opened to any issuer of green bonds, including those located outside of the EU.

 

3. EU Taxonomy – Delegated Acts

The EU Taxonomy Regulation (2020) introduced a framework for the classification of environmentally sustainable economic activities – thereby helping investors and companies to make informed investment decisions and preventing greenwashing.

To be considered aligned, an economic activity needs to contribute to one of the 6 environmental objectives (listed below), not significantly harm any other and meet minimum social safeguards:

  1. Climate change adaptation
  2. Climate change mitigation
  3. Sustainable use and protection of water and marine resource
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Protection and restoration of biodiversity and ecosystems.

The Regulation tasks the European Commission with establishing a list of criteria to be used to determine whether an economic activity contributes to one of the EU Taxonomy’s environmental objectives. These are also referred to as Technical Screening Criteria (TSC), which will be laid out in a series of separate Delegated Acts for each objective.

Climate Delegated Act – construction and real estate activities

The Climate Delegated Act published as part of the Sustainable Finance Package (April 2021) is the first of this series and classifies activities that contribute to mitigating and adapting to climate change (objectives 1 and 2).

The Delegated Act introduces TSC for climate change mitigation (Article 1) and TSC for climate change adaptation (Article 2). It defines key activities in each sector of the economy and criteria to determine to which extent they contribute to climate change objectives and ‘do no significant harm’ to other objectives. Key activities for the construction and real estate sector (covered in section 7) include:

  • Construction of new buildings
  • Renovation of existing buildings
  • Installation, maintenance and repair of energy efficiency equipment
  • Installation, maintenance and repair of charging stations for electric vehicles in buildings
  • Installation, maintenance and repair of instruments and devices for measuring, regulation and controlling of energy performance of buildings
  • Installation, maintenance and repair of renewable energy technologies
  • Acquisition and ownership of buildings.

 

Delegated Act supplementing Article 8

This Delegated Act was published alongside the renewed sustainable finance strategy and specifies the content, methodology and presentation of information to be disclosed by financial and non-financial actors concerning the share of sustainable economic activities in their business (according to the EU Taxonomy criteria).

Article 8 of the EU Taxonomy Regulation specifies the indicators related to turnover, capital expenditure (CapEx) and operational expenditure (OpEx) that companies have to disclose. The rules set out by the Delegated Act will allow companies to translate Technical Screening Criteria of the Climate Delegated Act into quantitative economic performance indicators (KPIs) and harmonise the disclosure process.

These Delegated Acts will have major implications for non-financial reporting in the real estate sector:

  • By January 2022, non-financial and financial undertakings that fall under the scope of the EU Taxonomy Regulation[1] will have to disclose the proportion of Taxonomy-eligible economic activities in their turnover, OpEx and CapEx.
  • Taxonomy alignment assessments, conducted following the KPI template provided by the European Commission, will have to be disclosed in January 2023 for non-financial undertakings and in January 2024 for financial undertakings.

Real estate companies and financial market participants should therefore start gathering relevant data on these activities as soon as possible to be ready for disclosure.

 

4. Corporate Sustainability Reporting Directive – widening the scope of non-financial reporting requirements

The Non-Financial Reporting Directive (NFRD) lays down the rules on disclosure of non-financial and diversity information for large companies, which have been in place since 2018. The rules apply to large public-interest companies with more than 500 employees (listed companies, banks, insurance companies).

The Corporate Sustainability Reporting Directive (CSRD) proposal revises the NFRD and increases non-financial reporting requirements for EU companies. The most important change suggested in the proposal is the extension of the Regulation’s scope to all large companies and listed companies - meaning that the CSRD will apply to approximately 50,000 companies compared to 11,000 companies under the NFRD. By extending the disclosure requirements to a bigger share of the economy, the EU hopes to raise awareness about the importance of non-financial reporting through the ripple effect these new rules will have on companies not covered by the Regulation.

In addition, the proposal seeks to ensure that companies report reliable and comparable sustainability information that investors need. It suggests a revision of the rules under the NFRD with view of homogenising and strengthening non-financial reporting. This will be done through the introduction of more detailed reporting requirements and the adoption of common reporting standards.

A key gap in the NFRD rules is indeed the absence of a common reporting framework, which the CSRD will fill by introducing a common set of ESG standards. These will be developed by the European Financial Reporting Advisory Group (EFRAG), who will ensure alignment of the standards with the EU Taxonomy requirements. A first version of the proposed standards is expected by mid-next year and the proposal will then be finalised by the end of 2022. Transposition of the Directive into national law will take place in 2023, meaning that first reports will need to be published in 2024 (covering 2023 activities).

The implications of the changes brought by this Directive will be significant:

  • Companies who currently report under the NFRD will be subject to more additional – and more stringent – reporting requirements.
  • Companies who are not currently covered by the NFRD might become subject to reporting requirements as of 2023-2024. If so, they should familiarise themselves with the new Directive and the common reporting standards that will be published next year.

 

Clich here to view timeline

 

How can Longevity Partners support you?

Longevity’s experts are closely monitoring updates in the EU policy framework for sustainable finance. Our team can support you in understanding the specific implications these measures will have for your company and assist you in your compliance journey.  

For more information about how Longevity Partners can support you, contact our team.

 

[1] Financial market participants that offer financial products, financial and non-financial undertakings withing the scope of the Non-Financial Reporting Directive. The scope of the undertakings subject to the EU Taxonomy will be enlarged once the Corporate Sustainability Reporting Directive enters into force.